South Korea to sharply boost budget spending to spur economy

SEJONG South Korea (Reuters) - South Korea’s government will boost budget spending more than previously planned at least for the next three years to help the local economy better cope with a tepid global recovery and a continued slump in domestic demand.

The annual government budget bill for next year and the medium-term fiscal management plans for the future, unveiled by the finance ministry, showed fiscal spending set to grow by an average of 4.7 percent each year for the 2015-2017 period.

Next year, spending will increase 5.7 percent to 376.0 trillion won ($363.46 billion), more than a 4.0 percent rise set for this year and a 3.5 percent gain marked under a previous medium-term fiscal management plan.

The ministry provided details of the plans to reporters in advance under embargo until early Thursday.

“We must take a proper response from the fiscal policy front to boost the economy,” Bang Moon-kyu, a vice finance minister in charge of budget affairs, told a briefing held on Tuesday at the ministry building in Sejong, south of Seoul.

The cost of aggressive spending growth is bigger budget deficits. The country is now set to suffer a fiscal deficit at 2.1 percent of the annual gross domestic product, worse than a 1.7 percent shortfall projected for this year.

South Korea has no serious problem with its fiscal position as it has long followed strict policies. President Park Geun-hye last year officially scrapped an earlier target of achieving a fiscal surplus during her term, which ends in early 2018.

The government will submit next year’s budget bill to parliament for approval. The parliament, in which the ruling party holds a majority of seats, is required by law to approve next year’s budget plans by early December.

South Korea’s fiscal year starts on Jan. 1.

Under the new medium-term fiscal management plan, South Korea is now scheduled to post a 1.3 percent fiscal deficit in 2017, the final full year of Park’s presidency, wider than a 0.4 percent deficit projected under the previous plan.

The government assumed next year’s economic growth at 4 percent for the budget, compared with a projected 3.7 percent for this year and last year’s actual 3.0 percent expansion.

Since Choi Kyung-hwan was nominated as finance minister in June, he has repeatedly warned that South Korea’s economy, the fourth-largest in Asia, was in danger of entering a protracted slump similar to one afflicting Japan.

After taking office in July, Choi introduced a series of aggressive stimulus measures, including an $11 billion public spending package and easing of mortgage curbs. The central bank, under his push, lowered the policy interest rate in August.

Choi told a news conference on Tuesday that the government could keep its expansionary fiscal policy for several years, mindful that an anticipated pick-up in economic growth next year might only be tentative.

Next year, the government plans to spend 115.5 trillion won - nearly one-third of its total planned budget expenditure - on health, jobs and welfare. This will be the most ever allocated to that category.

Spending to spur job creation will increase by 7.6 percent. South Korea’s unemployment rate of around 3.5 percent is one of the lowest among medium- to high-income economies, but the number of full-time, quality jobs available has been declining.

The finance ministry said the country’s sovereign debt would increase to 35.7 percent of the annual gross domestic product in 2015 from an estimated 35.1 percent for this year.

Separately, a ministry official said the government would sell up to a net 43.2 trillion won worth of treasury bonds next year, mostly to fund the fiscal deficit, more than a net 27.7 trillion worth set for this year.

The official said the government also plans to sell up to $700 million in foreign-currency bonds in 2015, mainly to pay for an existing 500 million euros worth of debt due to mature next year.